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Liquidity strength in CTAs

Date: Tuesday, August 30, 2011
Author: Elise Burgess, Financial Standard Online

Global hedge fund of fund investment firm, Financial Risk Management, finds liquidity and diversity in CTAs with volatility support in current alternative markets.

Financial Risk Management (FRM) has introduced weekly liquidity for its FRM Sigma Fund, which invests in a globally-sourced portfolio of Commodity Trading Advisers (CTAs) that specialise in managed futures.

These alternative investments mainly use futures contracts over indices and commodities and, according to FRM Australia managing director Richard Keary, offer liquidity that is completely aligned with its underlying assets.

"The mismatch between a fund's liquidity and its underlying asset base was a root problem in the 2008 financial crisis, causing several product structures to collapse," said Keary.

Keary believes Australian investors are facing a smaller alternative investment pool due to these issues with liquidity and demand for clearer investment products.

"There are circumstances where CTAs do well, and others where CTAs do not do so well, pending the upward and downward trends they follow. The point is that apart from generating uncorrelated market performance, CTAs offer added diversification in how they make investment decisions," Keary told Financial Standard.

CTAs do not act on forecasting, instead making decisions as trends emerge and, in Keary's opinion, offering true diversification to investment decisions that do model around forecasting.

"If fundamental forecasting is the key driver of most of your investments, you are not diversified."

FRM Sigma's underling investment has produced 14.85% annualised returns since inception in 2005. This is supported by 15.54% volatility.

Keary believes that while bonds and metal markets (particularly gold) have been the strongest thus far, an emerging CTA focus market is that of agriculture.

"While it can vary greatly across the agriculture industry, there can be significant fluctuations. For example sugar is something that we are seeing really emerge as strong investment and that is something that I think we will see more and more in the agriculture space."